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Chapter 10: Q21E (page 539)

(Analysis of Subsequent Expenditures) King Donovan 91影视 Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company鈥檚 plant asset book value is currently \(800,000, as indicated below.

Original cost

\)1,200,000

Accumulated depreciation

400,000

Book value

\( 800,000

The following expenditures were made to the plant facility during the current year.

  1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
  2. The entire plant was repainted at a cost of \(23,000.
  3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
  4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
  5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Short Answer

Expert verified
  1. Plant assets should be capitalized
  2. Painting costs are considered ordinary repairs
  3. Replacing the old plant roof is supposed to increase the service life of the property.
  4. Conceptually, the book value of the old electricity system needs to be removed.
  5. With an increase in useful life, a debit to accumulated depreciation occurs.

Step by step solution

01

Meaning of Subsequent Expenditure

Subsequent expenses are those incurred after an asset is recorded in the financial statement and delivered to the destination and state planned. Repairs, upkeep, overhauls, upgrades, and replacements could all cost money.

02

(a) Indicating the transaction and explaining its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Plant

270,000

Cash

270,000

(To record the addition made)

Plant assets are capitalized when they are added since a new asset has been created. As a result, this enhancement makes the plant more valuable.

03

(b) Indicating the transaction and detailing its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Improvement expense

23,000

Cash

23,000

(To record the improvement made)

Expenditures that do not improve the asset's service benefits are expensed. Painting expenditures are considered standard repairs since they keep the asset in good working order or return it to its previous state.

04

(c) Indicating the transaction and explaining its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Plant -roof

61,000

Loss on disposal

41,000

Plant-roof (old)

41,000

Cash

61,000

(To record the replacement made)

Investing in the new roof will increase the service potential of the asset.

05

(d) Indicating the transaction and detailing its accounting records.

Date

Accounts and Explanation

Debit($)

Credit($)

Repair expense

22,000

Cash

22,000

(To record the repair expense)

The book value of the preceding electrical system needs to be conceptually removed. However, in practice, it is generally difficult, if not impossible, to determine this quantity. In this situation, one of two techniques is used.

The second method is to reduce accumulated depreciation, assuming the replacement will prolong the asset's useful life and recover part or all of the previous depreciation. The difficulty with our current position is that the useful life has not increased, so it is unfair to debit accumulated depreciation. Consequently, must include this expense in the cost of the plant facility.

06

(e) Indicating the transaction and explaining its accounting records.

Date

Accounts and Explanation

Debit($)

Credit($)

Accumulated depreciation

47,000

Cash

47,000

(To record the addition made)

A detailed clarification is given in the transaction (d) answer. Since the asset's useful life has risen, a debit to Accumulated Depreciation appears to be the best option in this instance.

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Most popular questions from this chapter

(Purchases by Deferred Payment, Lump-Sum, and Nonmonetary Exchanges) Klamath Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Klamath鈥檚 controller, review the following transactions.

Transaction 1: On June 1, 2017, Klamath Company purchased equipment from Wyandot Corporation. Klamath issued a \(28,000, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Klamath will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of \)425 and installation costs of \(500 were incurred in completing this transaction. The appropriate factors for the time value of money at a 10% rate of interest are given below.

Future value of \)1 for 4 periods

1.46

Future value of an ordinary annuity for 4 periods

4.64

Present value of \(1 for 4 periods

0.68

Present value of an ordinary annuity for 4 periods

3.17

Transaction 2: On December 1, 2017, Klamath Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to \)220,000 and included the assets listed below. Klamath Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.

Yakima Book Value

Fair Value

Inventory

\( 60,000

\) 50,000

Land

40,000

80,000

Buildings

70,000

120,000

\(170,000

\)250,000

During its fiscal year ended May 31, 2018, Klamath incurred \(8,000 for interest expense in connection with the financing of these assets.

Transaction 3: On March 1, 2018, Klamath Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Klamath intends to use the land for a parking lot. The trucks had a combined book value of \)35,000, as Klamath had recorded \(20,000 of accumulated depreciation against these assets. Klamath鈥檚 purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of \)46,000 at the time of the transaction. In addition to the trucks, Klamath Company paid $19,000 cash for the land.

Instructions

  1. Plant assets such as land, buildings, and equipment receive special accounting treatment. Describe the major characteristics of these assets that differentiate them from other types of assets.
  2. For each of the three transactions described above, determine the value at which Klamath Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.
  3. The books of Klamath Company show the following additional transactions for the fiscal year ended May 31, 2018.
    1. Acquisition of a building for speculative purposes.
    2. Purchase of a 2-year insurance policy covering plant equipment.
    3. Purchase of the rights for the exclusive use of a process used in the manufacture of ballet shoes.

For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

  1. The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be \(81,000.
  2. 13,000 shares of common stock with a par value of \)50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of \(810,000, of which \)180,000 has been allocated to land and \(630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at \)65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at \(58 per share.

No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed.

Materials used

\)12,500

Factory supplies used

900

Direct labor incurred

15,000

Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used

2,700

Fixed overhead rate applied to regular manufacturing operations

60% of direct labor cost

Cost of similar machinery if it had been purchased from

Outside suppliers

44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine

\)1,300,000

Less: Accumulated depreciation

360,000

Book value

\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

  1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
  2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
  3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

(Analysis of Subsequent Expenditures) The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year.

Jan. 30 A building that cost \(132,000 in 2000 is torn down to make room for a

New building. The wrecking contractor was paid \)5,100 and was

permitted to keep all materials salvaged.

Mar. 10 Machinery that was purchased in 2010 for \(16,000 is sold for \)2,900

cash, f.o.b. purchaser鈥檚 plant. Freight of \(300 is paid on the sale of this

machinery.

Mar. 20 A gear breaks on a machine that cost \)9,000 in 2009. The gear is

replaced at a cost of \(2,000. The replacement does not extend the

useful life of the machine but does make the machine more efficient.

May 18 A special base installed for a machine in 2011 when the machine was

purchased has to be replaced at a cost of \)5,500 because of defective

workmanship on the original base. The cost of the machinery was

\(14,200 in 2011. The cost of the base was \)3,500, and this amount was

charged to the Machinery account in 2011.

June 23 One of the buildings is repainted at a cost of $6,900. It had not been

painted since it was constructed in 2013.

Instructions

Prepare general journal entries for the transactions. (Round to the nearest dollar.)
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